QDROphile

Here is something you need to know about an important issue that is inadequately covered by your playbook. The divorce proceeding, and all that comes out of it, including the terms of the settlement as reflected in the domestic relations order to be submitted to the plan., is personal to the plaintiff. Plan, its fiduciaries, and its service providers, are in line for a heap of trouble if they intervene or advise about personal matters, especially personal tax matters. The contents of the Tax Notice and what might be in the SPD are as far as the plan should go with respect to advising about tax consequences and strategies. I know you don't like to receive anything I have to say,. If your interest in fmsinc's post is academic, OK, but if you are thinking of passing along any advice, you are going way out on thin ice unless you are expressly engaged to provide services to participants'/employees.

I would be pleased with a happy outcome. If your plans are going to take action, particularly restricting accounts, the written QDRO procedures must spell out the circumstances and the procedure. And that is not the best policy or protection for the plan. It is a suggestion of the first published federal court decision on the subject as an approach that might pass muster. That court imposed liability on the plan for restriction based on less than receipt of a domestic relations order. The Department of Labor doesn’t quite have a grip on the law in this area, but you should take some comfort in its position that the plan should act on suggestion.

"My issue is with QDROphile, who is simply rude, and not even 100% accurate in all the advice he gave. " Yes, I was rude. It ticks me off when service providers cover matters that look manageable from the middle of the road in an off-the-shelf form-based world. QDRO practice in particular is tricky because the action is generated (1) in state court under state law either by (2) lawyers who are often not competent in this technical area or (3) untrained individuals in an environment usually involving great (4) emotional and (5) financial stress, all the more reason for the adviser to the QDRO fiduciary to have a broad and deep understanding beyond just the checklist aspects of qualification in order to minimize the complications at the plan level. Even the Department of Labor gets a lot of QDRO stuff wrong. So where are you right now? Unless you believe that the plan fiduciary or employer should take a paternalistic approach to deciding what is right or best for the participant (which I will not quarrel), the participant has been hung out with at least delay against his rights and wishes (as imprudent as they may seem to the experts). It could have come out differently, allowing the participant to manage his own life, even in desperation. The original post seemed to ask how to get the participant what the participant wanted. I was rude, but I am teachable. I responded without knowing what might be provided in the plan's written QDRO procedures, but I bet it would not make a difference, notwithstanding some astute comments by others concerning policies about action to be taken upon the receipt of a domestic relations order or the suggestion of an appearance of a domestic relations order. What was not accurate about the advice I gave?* *As for Larry Starr's disagreement with my warning about falling into the pit of unnecessarily engaging John Hancock, I was stating possibilities. He is correct that John Hancock should simply follow instructions from the appropriate fiduciary, but (1) we have no information about John Hancock's actual role or responsibilities, and (2) a lot of institutional service providers overstep their role and improperly interfere unless they are happy in their own minds with the proceedings. I wager that Mr. Starr has had to read the riot act to an officious provider about respecting the instructions of the appropriate fiduciary or compliance in some other fashion.

Pardon me while I bark first. Your ignorance about QDRO law and procedures probably prevented the practical solution that I offer below. Your should refer QDRO questions out to someone capable of advising about QDRO administration. That said, your standard of understanding and competence is about average in the industry, so don't take it too hard. What should have happened is the participant should never have shown the papers to the plan. The order (and it is a domestic relations order) applies only to the participant and has nothing to do with the plan. It orders the participant to pay half of the distribution to the former spouse. This may be stupid or pretty sneaky on the part of the former spouse; it changes the tax consequences and I pass on that issue. The direction has nothing to do with the plan. But the participant DID give the order to the plan, so next what should have happened is the plan (or its adviser) should have recognized that the plan was not implicated and bent the strict processing procedure and conclude that it has not received a domestic relations order and therefore it should process a distribution to the participant in normal course. The plan should not accommodate the participant's request to split the distribution check in any way -- the plan needs to completely disregard the order to keep itself clear. The entire distribution is to the participant -- just as the order says. You probably cannot now restore Humpty Dumpty. You have started processing the order as a domestic relations order. You may have to continue, especially since you jerked John Hancock's chain. If you understood QDRO processing, there is still a way to get the participant a distribution of half of the account right away, even while processing the domestic relations order that is not going to be qualified. I will refer you to section 414(p)(7) to give you ideas, but I am not going to spell it out. You need a shock to your system to make you understand that you are not competent to deal with QDROs and you should seek professional help that you or the plan pays for to extricate yourself from this mess. Or not. You can just let the participant dangle while you process the domestic relations order under usual procedures. The participant brought it on himself by not participating in the divorce.

And a prohibited transaction lurks under certain circumstances, probably not present here. While you are not the adviser to the individual, it is fair to advise that certain plan designs are not desirable for participants in general, or the plan. The provision would add some burden to administration and create opportunities for error.

Repaying the loan does more than create taxable basis. It is an investment that provides tax deferral on the earnings. However, that investment decision is not a no-brainer. One must consider the restrictions on distribution and the ordinary income rate of taxation vs. capital gains (depending on the actual investment choice).

Every employee has an employment contract, one way or another. Determining and disputing the terms of employment are what keeps a lot of employment lawyers in business. Of course you have to use the plan terms for participation in the plan. To do otherwise would create direct problems with plan documentation and operation. I observed that the failure to keep the personnel manual consistent with the plan terms is a potential source of liability that is not directly related to the operation of the plan. If the organization has an employment dispute with an employee, it is likely that the employee's lawyer will be interested in the personnel manual. Many employers are surprised to find that ERISA is their friend in employment disputes because it is often a shield against nuisance employment claims, such as eligibility for benefits or severance compensation. Your caption suggests that ERISA is not of service to this organization, so the employment law concerns are relevant.

The plan document is superior with respect to plan operation, meaning that there may be no plan problem with the exclusion. Other documentation, such as an employment contract might give an individual some right to participate and exclusion would breach the contract and create liability for the employer. The role of the manual in establishing the employment terms must be considered. That is why offer letters usually refer to benefit participation “in accordance with the terms of” the benefits plans.

Thank you for your contributions, including the good humor and the attempts at good humor. In particular, thank you for identifying IRS authority to dispel the silly notion that the 401(a)(17) limit is a timing rule.

If you take a new loan within a year after all loans have been paid, the law may reduce the maximum amount of the new loan. The design of your plan may have more relevant restrictions, so you need to check with the plan administrator. The summary plan description, or a separate written loan policy, for your plan should also describe limitations. There is no sure one-size-fits-all answer to your question. You have to learn the rules of your plan. My guess is that most plans would allow a new loan as soon as the prior loan is paid, subject to the limitation on the amount outstanding in the prior 12 months. Some plans allow more than one loan, so full payment is not necessary to originate a new loan.

Keep in mind that such a policy is simply a feature of the service provider's product, not a legal mandate. I maintain that such policies create risk of violation of the law, but good luck getting a change. It would help protect the plan if such a policy were reflected in the plan's written QDRO procedures. But good luck on getting really helpful QDRO procedures. You won't get them from the big investment/service providers.

She will be unable to roll Roth money to a 401(k) plan that does not offer a Roth account. Also, even if the plan offers Roth deferrals, the plan does not have to take Roth rollovers. Check with the plan administrator of the recipient plan in advance before ordering the distribution.

I suspect any limitations or disability would be a matter of the applicable banking regulations or bank charter. The tax code and ERISA are neutral. An employer can lend to its ESOP.

Also keep in mind that it is an employer decision about what contribution rate applies to different groups of employees, not individual decisions about the applicable rate. I cannot tell from the words used in the post what was going on or the level or collectivity of decision making. And usually an amendment or design or contribution rate decision is ultimately a matter for the board of directors, not the “executives.”

The IRS has historically shown that it does not understand what constitutes plan documents, plan amendments, or corporate procedures such as resolutions and delegation. The discussion above does nothing to clarify what constitutes plan terms and amendment of plan terms based on solid principles, therefore what is left is a confusing hodgepodge of apparent "separate" rules to ponder and try to remember and reconcile. 1. A proper and properly drafted corporate resolution can be a plan amendment. A lot is packed into "proper" and "properly" including respect for plan terms. That is not the best style for plan documentation. 2. Assuming the board of a plan sponsor has the authority to amend the plan, the Board should have authority to delegate the amendment function. The delegate must act properly, including act within the authority and within proper procedures for documentation. It would be nice if corporate and plan documents spelled this out rather than forcing reliance on generic corporate and agency law, but good luck with that in the world of pre-approved documents from vendors who mostly have concerns only for LRMs and their own internal administrative issues.

Usually the persons who want the legal opinion specify what they want the opinion to cover, and often with great specificity.

This is not going to help much. There is no definition of retirement. This comes up most frequently with respect to required distributions in situations where there is some wisp of employment that really should not thwart the policy behind the requirements, often in professional firms where the person is really self employed and the "employer" has not real interest in the employment status. But you are looking in a QDRO situation. I always thought AT&T v Hopkins was a crock (and so did the editors of the ERISA Litigation Reporter), until I was convinced by a Ninth Circuit case* (or at least conceded to its argument that at least made sense and Hopkins did not) . That case argued that in the "let's get Reagan re-elected" rules for the benefit of women, there is a tension between the QDRO rules and the QJSA rules, both relating to spouses and defined benefits. The point was not the definition of retirement. The decision resolved the tension in favor of the result in Hopkins, saying that the congressional intent tipped in favor of the QJSA spouse over the QDRO spouse in a close call. So be it. To me, that underlines that the rights of the current spouse are not "locked" until the benefit starts, which is when the QJSA is triggered. The QJSA is is not triggered at either termination of employment or attainment of retirement age. The QJSA benefits the person who is the spouse at the time the benefit starts. That could be the third spouse after termination of employment as far as the plan is concerned. The inquiry at the start of benefits is (1) is the participant married?, and (2) who is the spouse NOW who can consent to the form of benefit? That is also true under the bad terminology and incomplete thinking of Hopkins. The federal rules, unlike state domestic relations law, does not care who is the spouse when the benefits are accrued. Arguing that the spouse at the time of termination is "locked" is based (imperfectly) on the idea of when the benefits accrue relative to the marriage. *I thought Tise, but I looked and it was not; it was probably post-Tise.

What does “informally addressed” mean? Speaker at at a conference? Comments during an audit? FAB? Is it reproducible?

Is MEP a multiemployer plan or a multiple employer 401(k) plan? If the latter, the employer should get some assurance that the employer is not walking into a securities law violation.

Indeed.

I do not want to start this debate over again, but, subject to state law (and all the states I am familiar with are OK with this), the plan can be designed to effectively prevent an employee participant from electing to stop payroll deductions for loan payments. It is not generally done because of (1) ignorance about how to do it, which requires a sophisticated use of state law, and (2) it increases administrative burden, which the big providers are unwilling to contemplate and the sponsors (except for paternalistic compliance nuts) are unwilling to pay for directly or indirectly even if someone offered it to them. So if y'all agree to quit saying it CANNOT be done I agree to stop arguing that it in fact SHOULD be done to comply with the ERISA rules. But you don'f have to agree. This my final post on the subject because it matters to no one, least of all the regulators.

Possibly a loan failure, which would be a prohibited transaction, Certainly an improper contribution, which is a disqualifying event.

Are you referring to justifying the coverage of the investment "loss" based on a breach of fiduciary duty? That has been approved by the IRS before.

The loan payment schedule is usually a level payment amortization, so the sum of the scheduled loan payments is potentially much greater than the principal balance plus the unpaid actual accrued interest to the date of payment. I would not get too excited about the prepayment of interest through the end of the month of prepayment (meaning that the scheduled payment for the month* can be included in the prepayment) rather than calculating to the actual prepayment date. The unpaid principal balance has to be calculated and separated because it is included in the remaining payments along with the scheduled interest component of each scheduled payment. *I would have to think about a quarter for a quarterly amortization schedule.

I disagree. I think prepayment of the outstanding loan balance is acceptable (and probably must be allowed), but paying more than the outstanding balance (the sum of future payments as scheduled) is not acceptable. The IRS will treat the amount in excess of the outstanding balance as an illegal contribution. Look at it this way: When the outstanding balance is paid, the amount of the payment will be invested and will start to have investment return. The investment return (assume it to be positive for purposes of illustration) is not a contribution. But if the plan accepts more than the balance (the difference between the sum of scheduled payments minus the balance), the account will receive not only the balance, but also an "earnings" amount that is in addition to the earnings that the balance, as now reinvested, will receive (plus earnings on those earnings). Foul!